| Zydus Lifesciences Limited | ||||||
| Ratings reaffirmed at 'CRISIL AA+ / Positive / CRISIL A1+ ' | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA+/Positive/CRISIL A1+’ ratings on the bank facilities and debt programme of Zydus Lifesciences Ltd (Zydus Life; a part of the Zydus group).
Consolidated revenue grew 5% on-year in fiscal 2022 (adjusted for the sales of the animal healthcare business), supported by growth in the domestic formulations and emerging markets even as revenue from the US degrew due to continued intense pricing pressure. With improved performance in the US formulations market (13% on-year growth) on the back of new product launches as well as growth in the consumer wellness segment after the pandemic, revenue grew by 4% in the first-half of fiscal 2023, constrained to some extent by the high one-off sales of Covid-related products in the domestic market in the previous fiscal. The recent resolution of the United States Food and Drug Administration (US FDA) warning letter to the group’s plant at Moraiya (Gujarat) will pave way for higher number of product launches in the US market in the next fiscal. Revenue is expected to grow 9-11% annually over the medium term on the back of new product launches and ramp up in sales of biosimilars and new chemical entities. CRISIL Ratings notes the sales of the Zydus group’s Covid-19 vaccine – ZyCoV-D – has been modest since its launch, as demand waned, resulting in lower than anticipated revenue growth in fiscal 2023 and 2024.
Consolidated operating margin remained healthy at 22.1% in fiscal 2022, supported by cost-control measures undertaken by the group. However, with sustained high input prices and provision of ~Rs 160 crore towards ZyCoV-D and other covid-related drugs, margin declined to 20.1% in the first-half of fiscal 2023. Going forward, the operating margin is expected to remain healthy at 20-22% supported by ability to pass on majority of input cost increase to customers, softening pricing pressure in the US market and price hikes in the domestic market.
The ratings continue to be supported by sustained improvement in financial risk profile with gross debt significantly reducing to Rs 2,419 crore as on September 30, 2022, from Rs 4,653 crore as on September 30, 2021, with strong cash accrual. Also, with high liquid surplus from the sale of the domestic animal healthcare business in the second quarter of fiscal 2022, net debt reduced below Rs 1,434 crore as on September 30, 2022, and net debt/Ebitda (earnings before interest, taxes, depreciation, and amortisation) was 0.4 time in the first-half of fiscal 2023. Financial risk profile is expected to remain strong, with net debt/Ebitda remaining at comfortable levels over the medium term, supported by strong cash accrual and moderate capital expenditure (capex) as well as inorganic growth plans.
The ratings continue to reflect the established position of the Zydus group in the branded generics market in India and the expected benefits from growth in the wellness segment; the ratings also factor in the growing presence in international markets, particularly the US, and strong financial risk profile. These strengths are partially offset by exposure to risks related to unfavourable regulatory changes, increasing competition and price erosions in the regulated generics US market. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Zydus Life and its 42 subsidiaries and stepdown subsidiaries (collectively referred to as the Zydus group) as all these entities operate in the pharmaceutical and related space, and have significant operational linkages and a common management. For three joint ventures (JVs), CRISIL Ratings follows a moderate integration approach; specifically factoring in the share of profit from JVs and of any incremental investment required by them. CRISIL Ratings has amortised intangible assets and goodwill consolidated on earlier acquisitions over five fiscals and on Heinz India Pvt Ltd (HIPL) acquisition over 10 years. Both profit after tax (PAT) and networth are adjusted to that extent.
Please refer Annexure - List of a Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths Established market position The Zydus group is one of the top five players in the domestic formulations market, and domestic sales formed 32% of consolidated revenue in fiscal 2022. The group is ranked among the top 3 players in the high-growth segments such as respiratory, pain management, gynaecology and dermatology, which account for about 11%, 10%, 6% and 5%, respectively, of its domestic formulation sales. It has strengthened its marketing team over the past few years, putting greater thrust on market strategies such as growth in the categories, integration of channel partners, supply chain and procurement to improve revenue and cost synergies. The group also has established presence in rest-of-the-world markets of Brazil, Mexico, Sri Lanka and South Africa where it reported healthy revenue growth despite geopolitical challenges and adverse macro environment. Rest-of-the world segment (including Latin America) formed 8% of the consolidated revenue in fiscal 2022. The company also has a healthy pipeline of complex molecules and biosimilars in the domestic and emerging markets, which will be the growth drivers over the medium term.
Growing presence in the regulated generics markets Business prospects are supported by growing presence in regulated generics markets such as the US and Europe, which together formed 41% of consolidated revenue in fiscal 2022. In the US, the group had 326 approvals and filed 431 abbreviated new drug application (ANDAs), as on September 30, 2022. Healthy pace of filings and approvals in the US, also reflected in the strong ANDA pipeline of over 100, will strengthen the US business. The Zydus group was the fifth-largest pharmaceutical company in the US generics market as per IQVIA MAT March 2022. The US FDA reinspected and cleared the warning letter on the Moraiya plant in November 2022 that will pave way for higher number of product launches, thereby leading to expected revenue growth in the US market next fiscal.
Strong financial risk profile Financial risk profile is marked by healthy capital structure and debt protection metrics. Adjusted gearing improved to 0.2 time as on September 30, 2022, while net debt/Ebitda and interest coverage ratio improved to 0.4 time and 25 times, respectively, in the first-half of fiscal 2023 due to debt reduction from its strong cash accrual. With the sale of the animal healthcare business in fiscal 2022, liquidity improved sharply to Rs 3,460 crore as on March 31, 2022, part of which was utilised to fund the equity buyback of Rs 750 crore in the first-half of fiscal 2023 as well as to lower working capital debt. Financial risk profile is expected to remain strong with net debt/Ebitda sustaining at comfortable levels over the medium term, after factoring in moderate capex and inorganic growth plans. Any material debt-funded acquisition or investment in group companies could adversely impact debt metrics and liquidity and would remain a key monitorable.
Weaknesses Exposure to risks related to unfavourable regulatory changes The Zydus group remains exposed to regulatory risks, both in the domestic and international markets, particularly the US. For instance, in October 2019, a warning letter was issued by the US FDA for the Moraiya plant, which impacted new product launches. While the USFDA has recently cleared this warning letter, any such regulatory issues on any of the group’s facilities in the future could impact revenue and profitability. The ongoing litigation by the anti-trust division of the US Department of Justice on industry generic players regarding price-collusion allegations remains a monitorable. Furthermore, any price-control measures of the government in the branded segment may weaken the domestic formulation growth.
Exposure to competition, volatility in foreign exchange rates and stretched working capital cycle The group faces intense competition in regulated markets, where innovator companies engage in aggressive defence tactics by launching authorised generics, and there are several cost-competitive Indian players present. Furthermore, generics players in regulated markets are affected by severe price erosions, as witnessed in the US in fiscal 2022, given the commoditised nature of products, and government pressure to lower prices. Strong bargaining power of distributors in the US leads to large working capital requirement: gross current assets remained at around 232 days as on March 31, 2022. However, ample liquidity and high financial flexibility are likely to meet incremental working capital requirement. |
Liquidity: Strong Healthy cash and cash equivalents (including investments in mutual funds) of nearly Rs 985 crore as on September 30, 2022, and strong annual cash generation support liquidity. Besides, the company has sanctioned fund-based bank limit of about Rs 4,000 crore, which remains moderately utilised at about 50% for the 12 months through October 2022, adding to liquidity. Annual cash accrual of Rs 2,500 crore will suffice sufficient to meet annual capex of Rs 900-1,000 crore and fund expected moderate inorganic growth plans, besides long-term debt obligation of ~Rs 520 crore in fiscal 2023, and ~Rs 200 crore in fiscal 2024.
Environment, social, and governance (ESG) profile CRISIL Ratings believes the environment, social, and governance (ESG) profile of Zydus Life supports its already strong credit risk profile.
The pharmaceutical sector can have a significant impact on the environment on account of greenhouse gas emissions, water use and waste generation. The social impact of the sector is characterised by impact on the health and wellbeing of its consumers on account of its products and on employees and local community on account of its operations.
Key ESG highlights:
There is growing importance of ESG among investors and lenders. The commitment of the group to ESG principles will play a key role in enhancing stakeholder confidence and ensure ease of raising capital from markets where ESG compliance is a key factor. |
Outlook Positive The group will maintain its diversified revenue profile across geographies and healthy cash accrual over the medium term. Financial risk profile is expected to remain strong with healthy capital structure and significant improvement in operating performance and debt protection metrics. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Cadila Laboratories was founded in 1952 by Mr Raman Patel and Mr Indravadan Modi. Cadila Healthcare was incorporated in 1995 following the split of Cadila Laboratories, with Mr Modi and his family's share being moved to a new company. The division that was managed by Mr Raman Patel’s son, Mr Pankaj Patel, was renamed Cadila Healthcare, which was again renamed Zydus Life in February 2022. Zydus Life got listed on the Bombay Stock Exchange in 2000. Over the years, Zydus Life has grown to become one of the top five pharmaceutical companies in India. It also has growing presence in the regulated markets, particularly the US, and is one of the top 5 players in the US generic market. Other segments include emerging markets formulations, consumer wellness, animal healthcare and bulk drugs.
As on September 30, 2022, the promoters held 74.98% stake in Zydus Life, 5.36% was held by mutual funds, and the balance was held by the public and others.
For the half-year ended September 30, 2022, the company reported a PAT of Rs 1,041 crore (Rs 3,590 crore in the corresponding period previous fiscal) on net sales of Rs 8,207 crore (Rs 7,762 crore). |
Key Financial Indicators
*Adjusted for goodwill and intangibles amortization |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
^Interchangeable with bank guarantee and letter of credit facility *Interchangeable with letter of credit facility @ Not placed |
Annexure – List of entities consolidated
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Criteria Details
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